Monday, February 23, 2009

Gold's 'Perfect Storm' Rages On

By ALLEN SYKORA
Gold's eight-year bull market may have at least a few more years to run and could carry the precious metal beyond an inflation-adjusted record north of $2,000 an ounce, managers of precious-metals and natural-resource mutual funds say.
Friday, gold for February delivery rose $25.70, or 2.6%, to $1001.80, the highest settlement for a front-month contract since March 18, when it closed at a record $1003.20. Prices surged 6.4% for the week.
"We don't see this being near an end at all," said Brian Hicks, co-manager of U.S. Global Investors' Global Resources Fund, which invests in gold and other commodities. "In fact, I would classify what is taking place right now as a 'perfect storm' for gold."
Many investors are diversifying away from financial assets and into gold because of uncertainty about the global economy and banking sector, he said.
"We think this definitely could be a trend that continues," he said. "The bull market we're seeing could go much higher than people expect, given what's happening in the financial sector."
To understand today's strong interest in gold, investors only need to read newspaper headlines, rather than study more fundamental supply and demand considerations such as jewelry demand during the Indian wedding season or mining output, said John Hathaway, portfolio manager of Tocqueville Gold Fund.
"It all comes down to what bothers investors," he said. "They don't feel they can safely place their money into financial assets. So they look for other places to go, and gold is one of the things that usually come to the top of the list."
He suggested the length of the rally will hinge on how long the macroeconomic uncertainty and the low returns on other investments continue.
"I don't think it's speculative," he said. "It's genuine concern about everything from the crumbling of the financial system to the political landscape in the U.S. and economies around the world in the free fall."
Mark Johnson, portfolio manager of USAA Precious Metals & Minerals Fund, figures the spot price of gold will "blow through" the March intraday peak of $1,032.70. Tocqueville's Mr. Hathaway suggested the price of gold conceivably could hit a "multiples of a thousand," although this might be a couple of years away.
Gold would have to climb to around $2,200 to $2,300 to break the 1980 record, after adjusting prices for inflation.
"Gold lagged the commodity bull market that we saw up until 2008," said Mr. Hicks, the U.S. Global Investors manager. "So it's not out of the question for gold to rise to its inflation-adjusted high, particularly given the fact gold is a small market and there are going to be a lot of dollars with people looking to place their money in tangible assets rather than intangible assets at this point in time."
Tocqeville's Mr. Hathaway said the case for gold is helped limited global supplies of physical metal. Traditionally, much of the investment demand has been in paper form, such as futures contracts. But in the last half-year, there has been a "tremendous" increase in the desire to hold physical gold such as coins or bars, or exchange-traded funds that are backed by physical gold, he said.